Chukchi high five

Alaska OCS sale draws five international players, $2.7 billion in high bids

Kristen Nelson

Petroleum News

It began routinely enough for an Alaska oil and gas lease sale with a seemingly too-small bid by an unfamiliar company, followed by bids in the tens of thousands and hundreds of thousands of dollars per block by five well known international players, most with Alaska operations or land positions.

Then bids hit the million-plus range; then the tens of millions. Twenty million seemed high, then $50 million. Somewhere along the way Shell and ConocoPhillips started duking it out over the same tracts — sometimes far apart in bids, sometimes breathtakingly close.

A big audience followed as 667 bids were read for 448 blocks in Anchorage Feb. 6.

Welcome to the high-stakes world of a major outer continental shelf lease sale.

This wouldn’t have been unusual for the Gulf of Mexico but it was for Alaska.

When the Feb. 6 Anchorage bid reading was over, the U.S. Minerals Management Service had a record — for Alaska — of $2,662,059,883, call it $2.7 billion in high bids. The total of all bids read was $3,389,919,496, some $3.4 billion.

Final results won’t be known for about 90 days because the companies weren’t just bidding against each other: MMS will now evaluate the bids on a fair market value basis and could reject some.

Shell Gulf of Mexico Inc. outspent other bidders several times over, with $2.1 billion in high bids for 275 blocks.

ConocoPhillips Co. had high bids of $506.4 million for 98 tracts.

Repsol E&P USA Inc. had high bids of $14.4 million on 93 tracts.

StatoilHydro USA E&P Inc. had $14 million in high bids on 16 tracts.

Eni Petroleum US LLC had high bids of $9.3 million on 18 tracts.

Iona Energy Company (US) Ltd. had a single high bid of $61,000.

NACRA (North American Civil Recoveries Arbitrage) Corp. had a single high bid of $400.

See the page 1 sidebar on the geology of the Chukchi and where the companies bid; see page 1 story on StatoilHydro.

Chukchi an energy frontier

MMS Director Randall Luthi, in Anchorage for the bid reading, called the Chukchi Sea one of the last energy frontiers in America, and pledged development in an environmentally sound manner.

Luthi, who took over at MMS in July, said he’s frequently been asked — in light of environmental concerns — why hold this sale?

The answer, he said, is domestic energy demand, and an opportunity in the Chukchi to do something to improve the nation’s energy security by developing more energy.

He said the sale also “offers another opportunity and challenge” — to show that the leases can be developed in “an environmentally sound manner and … in a way that recognizes and preserves the culture” of the North Slope and those dependent on other natural resources.

Luthi said after the sale that MMS is “very pleased with the sale,” which he said “surpassed our expectations.”

MMS offers acreage in the Beaufort Sea, and has had some big lease sales there, but that acreage has been offered regularly in recent years, while the agency hasn’t offered the Chukchi Sea in a lease sale since 1991.

The most successful prior sale in the Alaska OCS was in 1982 when a Beaufort Sea sale brought in high bids of $2.1 billion.

Shell: $2.1 billion in high bids

Shell, which returned to Alaska with a bang three years ago when it spent more than $44.4 million on 86 winning bids in a 2005 MMS Beaufort Sea sale, had $2.1 billion in high bids — 275 of 667 bids — in the Feb. 6 Chukchi Sea Sale 193.

Shell bid a total of $2.2 billion on 302 tracts, losing on only 27, with $82.2 million in unsuccessful bids.

In addition to being the largest bidder, Shell also had the 10 highest bids, ranging from $76.2 million to $105.3 million for NR03-02 block 6763. All top 10 bids were in the NR03-02 “Posey” official protraction diagram area.

A Shell spokeswoman told Petroleum News after the 2005 Beaufort Sea sale that the company had “been investigating returning to Alaska for some time and this lease sale has allowed us to build a new position here for Shell.”

Annell Bay, Shell vice president exploration for the Americas, said after the Feb. 6 sale that she sees the Chukchi as “a proven, prolific and undeveloped hydrocarbon basin.”

“Easy oil” worldwide has primarily been found, Bay said, and in the Chukchi there is an opportunity to develop a basin.

A handful of wells were drilled in the Chukchi about 25 years ago and data from those wells is available, Bay said, and Shell did use that data in evaluating opportunities available at the lease sale.

“We spent the last four years doing significant regional technical subsurface work on the geology … and all of that regional work underpinned our confidence in bidding today,” she said.

Shell said in a post-sale statement that it holds an equity position in 179 lease blocks in the Beaufort Sea, and completed seismic programs in both basins in 2006 and in 2007, including the first 3-D seismic ever conducted in the Beaufort and Chukchi.

A lot of competition

Shell bid on 302 blocks and had the high bid on 275 of those; all of Shell’s bids totaled $2.2 billion; the company’s successful bids totaled $2.1 billion.

ConocoPhillips bid on 145 blocks and had the high bid on 98, bidding $1.1 billion and having the high bid on less than half of that dollar amount.

Shell accounted for 78 percent of the high bids; ConocoPhillips accounted for 18 percent; between the two, they accounted for 96 percent of the sale’s high bids in dollars.

Eni Petroleum bid $35 million on 74 blocks; it had high bids on 17 blocks for $8.9 million.

StatoilHydro bid $31.6 million on 33 blocks and had the high bid on 16 of those for $14.4 million. The company said in a release after the sale that it partnered with Eni on 14 of the bids, StatoilHydro 60 percent, Eni 40 percent.

Repsol bid $15.6 million on 104 blocks and was the high bidder on 93 blocks for $14.4 million.

Iona Energy bid $7.7 million on 38 blocks and was high bidder on one for $61,000.

NACRA bid on one block and had the high bid at $400.

Of the two small bidders, it does not appear that Iona Energy has bid in Alaska before, but NACRA (North American Recoveries Arbitrage) Corp., bid in the MMS 2005 Beaufort Sea sale. The company was high bidder on two leases, but “did not pursue them,” MMS said in late 2005.

A recently formed company called “Iona Energy Company (UK) Ltd.” may be the parent company of Iona Energy Company (US) Ltd., the bidder in the sale.

The chips are on the table in the search for oil and gas under the remote Chukchi Sea, off Alaska’s northwest coast. But, with ice-laden water for many months of the year, a severe climate and no supporting infrastructure, why did oil companies place $3.4 billion at risk in the U.S. Minerals Management Service’s Feb. 6 lease sale?

$100-a-barrel oil and an escalating worldwide oil demand certainly help. But the key surely lies in the spectacular geology of the Chukchi Sea outer continental shelf.

Although the U.S. Chukchi Sea remains largely unexplored, more than 100,000 line-miles of seismic data collected in the past have revealed subsurface geology that holds the promise of a world-class oil and gas province.

The U.S. Minerals Management Service has estimated that there may be 15 billion barrels of oil and 76 trillion cubic feet of natural gas under the Chukchi Sea, although these figures are subject to high levels of uncertainty.

The Chukchi seismic data have revealed a westward extension of the geology of the prolific North Slope of Alaska, with all of the major North Slope rock units identifiable in the seismic sections. And the only five wells ever drilled in the Chukchi, dating from the late 1980s and early 1990s, confirmed the presence of some of that North Slope-equivalent stratigraphy.

Many traps

The strata under the Chukchi Sea have been folded and faulted on numerous occasions, thus giving rise to an abundance of structures that could trap oil and gas. According to a 2006 MMS assessment of the Chukchi Sea planning area, “The current MMS inventory contains 856 mapped prospects (generally anticlines, fault traps or stratigraphic wedge-outs) that remain to be drilled in the Chukchi Sea. … These prospects range in mapped closure areas from hundreds of acres to hundreds of thousands of acres, with nearly a dozen larger than the major oil fields of the Alaska North Slope.”

And geologists tend to view northern Alaska as particularly rich in oil and gas source rocks, with major regional source horizons occurring in all of the major rock sequences. Those source rock horizons appear to extend across the Chukchi shelf and, coupled with a likely thermal and burial history conducive to petroleum formation, there is a high probability that substantial quantities of oil and gas have been produced in the region.

Just to re-enforce that likelihood, GX Technology has found widespread evidence in its 2006 seismic data for underground gas chimneys under the Chukchi (a gas chimney shows up as a distinctive pattern on a seismic section and represents a column of natural gas bubbling through the rock strata from a deep source).

Franklinian basement

The economic basement of the Chukchi is generally reckoned, as elsewhere in northern Alaska, to be a sequence of rock known as the Franklinian, formed more than about 400 million years ago. Although these rocks have mostly been intensely folded and thermally altered, with little or no petroleum potential, oil shows in Franklinian dolomites at the eastern end of the North Slope indicate a possible oil play. And some deep 2-D seismic shot by GX Technology in 2006 has revealed at least some areas of what appear to be relatively undeformed Franklinian rocks under the Chukchi.

Another major rock sequence, known as the Ellesmerian and ranging in age from late Devonian to early or mid-Jurassic, lies over the Franklinian basin. The Ellesmerian includes one of the major North Slope petroleum systems, with the rock sequence reservoiring the giant Prudhoe Bay field, as well as the Northstar, Lisburne and Endicott fields.

On the North Slope, the Ellesmerian formed from sediment washed from an ancient landmass to the north of the present Beaufort Sea coast into an east-west aligned marine basin in the current location of northern Alaska. Under the Chukchi Sea, that basin swings around to the north to form what geologists term the Hanna Trough, a huge sunken area of Franklinian basement passing up the center of the Chukchi Sea shelf and apparently containing a thick sequence of Ellesmerian strata. To the west of the Hanna Trough lies a higher area of basement rock known as the Chukchi Platform, while to the east of the Hanna trough lies the Arctic Platform.

The Hanna trough disappears to the north under the North Chukchi Basin, a subsiding area of thick sediments extending west from the Beaufort Sea continental shelf.

Beaufortian

The next major stratigraphic sequence, referred to as the Beaufortian, resulted from the breaking apart or rifting of the Canada basin of the Arctic Ocean in Jurassic and early Cretaceous times. The rifting resulted in the formation of fault blocks, with sagging blocks between higher blocks. Deposition of sand into the sags gave rise to reservoir quality sandstones. The Kuparuk River, Alpine and Milne Point fields, among others, involve Beaufortian reservoirs.

Geologists have identified likely Beaufortian sags across a wide area of the northern Chukchi Sea.

A major structural high called the Barrow Arch is associated with the Beaufortian rifting and extends along the Beaufort Sea coast, where it guided the migration of petroleum into major fields such as Prudhoe Bay. The Barrow Arch extends west under the Chukchi Sea, where it bifurcates into two arches. One of these arches extends northward, before veering to the southwest. The other arch veers southwest immediately, to pass near the center of the U.S. sector of the Chukchi.

The existence of extensions of the Barrow Arch under the Chukchi Sea offers the enticing possibility of oil and gas accumulations in similar settings to the major oilfields of the North Slope. It is, however, important to note that because of variations in rock type across the hundreds of miles separating the central Chukchi Sea from Prudhoe Bay, seeking Prudhoe Bay “look-alikes” in the Chukchi may not prove rewarding — the Chukchi Sea geology probably needs to be viewed on its own merits.

A third major northern Alaska rock sequence, known as the Brookian, formed in Cretaceous and Tertiary times as a result of the emergence of the Brooks Range. The emerging mountain range caused sediments to flow north into a huge basin called the Colville basin under the North Slope. Sediments also poured out over the Beaufort Sea continental shelf, and into the North Chukchi basin. The Colville basin with its Brookian sedimentary strata extends west under the Chukchi Sea.

GX Technology has reported evidence from its 2006 seismic data for a very thick sequence of Ellesmerian and Brookian rocks throughout the Hanna Trough.

North Slope fields such as Meltwater, Tarn and West Sak are associated with the Brookian sequence. And in the Beaufort Sea the Sivulliq oil field that Shell wants to drill into has a Brookian reservoir.

Big structures, big money

So how does all this relate to the bids in the February lease sale?

First of all, the sheer scale and petroleum potential of the region accounts in part for the huge amount of money placed on the table — with high oil prices and oil companies having to explore in ever more challenging regions, perhaps the time for the Chukchi Sea has arrived.

Secondly, a glance at a bid map reveals an interest in some of the really big geologic structures.

Shell and ConocoPhillips locked horns over the Burger structure, a 25-mile-diameter dome on the southern extension of the Barrow Arch, on the east flank of the Hanna Trough. Shell won out over the crest of the structure with some massive bids, the highest of which amounted to $105 million on tract 6763 near the Burger well, with ConocoPhillips putting $36 million on the table for that same tract.

The Burger well, one of the five Chukchi exploration wells and drilled by Shell in 1989-90, tested the structure and found a major natural gas pool in Kuparuk-equivalent sandstone of the Beaufortian sequence. MMS has estimated the possibility of 14 trillion cubic feet or more of gas in the Burger reservoir. And a Brookian sandstone higher in the well also appeared to contain a gas pay. At a total depth of 8,202 feet, the Burger well did not penetrate rocks below the Beaufortian.

The acreage that ConocoPhillips has probably picked up around Burger lies to the north and west and south of the crest of the structure, Erec Isaacson, ConocoPhillips Alaska’s vice president of land and exploration, told Petroleum News.

“We basically got some of the down-dip blocks,” Isaacson said.

ConocoPhillips has, however, established a dominant position on what Isaacson characterized as the second largest or one of the largest Chukchi structures, a large anticline to the southwest of Burger on that same Barrow Arch extension, but on the east flank of the Chukchi Platform.

“We’re happy with the outcome,” Isaacson said. “Obviously we’ve captured one of the large structures out in the Chukchi Sea for ConocoPhillips.”

The Klondike well, drilled by Shell in 1989 into that structure, found strata equivalent to the Sadlerochit group that hosts the main Prudhoe Bay field reservoir. Unfortunately, the Sadlerochit at Klondike consists of shale, rather than the reservoir sandstone found at Prudhoe Bay. But the well did penetrate Beaufortian sandstone with what MMS has described as “oil pay,” and oil shows were also found in Brookian sands.

There are known to be very prolific source rocks in the neighborhood of the Klondike well, Isaacson said.

Shell: widespread bids

Shell was less specific about its exploration targets.

The company’s bids were based on the company’s evaluation of the region, carried out over the past four years, Annell Bay, Shell’s vice president of exploration for the Americas, told a press conference after the lease sale.

“We see opportunities and potential … and placed those (bids) on what we think is appropriate from what we see out there,” Bay said.

In addition to the Burger structure Shell bid on tracts in numerous places across the lease sale area. In particular the company bid along a broad zone extending southwest from an area about 50 miles west of Burger and resembling a fairway of leases issued in the Chukchi Sea lease sales of 1998 and 1991. MMS oil play maps suggest a wide variety of potential plays in this region, including Ellesmerian, Beaufortian and Brookian possibilities.

The northern end of this Shell fairway is close to the Crackerjack well that was drilled in 1991. Crackerjack unsuccessfully tested the Sadlerochit but found 20 feet of oil pay in the Brookian and gas pay in the Ellesmerian Ekoocha formation.

Repsol Exploration & Production USA was the apparent high bidder on a group of tracts to the north of the Shell fairway, next to the Popcorn well, drilled in 1990 on the northern extension of the Barrow Arch. The Popcorn well sought the Sadlerochit and deeper rocks of the Ellesmerian, but